When my husband and I first got married, we realized that during our engagement we discussed everything related to combining our lives except our future budget. Combining two incomes and two sets of expenses was something we felt completely overwhelmed talking about. We hardly knew where to start after we were married.

While I am the type to keep track of all my expenses via an Excel document, my husband is the type that goes over his purchases via his online bank account when his money seems to be suddenly missing. Clearly, we were at a standoff!

Racking my brain for a quick and easy solution to our obvious money-handling problems, I remembered something a friend of mine and her husband did after they first got married. I remembered seeing cash-filled envelopes on their refrigerator with words on them like "Gas" and "Clothing." So, curious and desperate, I called her up to ask for the details! Turns out, my friend and her husband were budgeting themselves using a very popular method dubbed the “Envelope System.

The envelope budgeting system is very simple to follow. It is based on cash-only purchases for flexible budget areas in which over-spending generally occurs and can be implemented using the following steps:

1. Look through your bank and credit card statements for the last four months. Start to put into categories purchases you make consistently every month that are not "bill" related. (Bill related items refer to: mortgage or rent payment, electric bill, water bill, etc.) Total up the amount you spent in these categories for each month. For us, these categories consisted of: Gas, Grocery, Clothing/Home Décor, Eating Out, Medical, Health/Beauty, and Misc/College. Because everyone's budget is different, your categories may look very different than ours.

2. Average your monthly spending habits for each category. Do this by totaling up the amount you spent in each and dividing the amount by 4 (for the 4 months you gathered your information).

3. Decide if the amount of money you are currently spending in these categories is reasonable for your budget. If you think you overspend in the clothing category, for example, decide on a new dollar amount you can reasonably continue to spend monthly.

4. Make your envelopes! Start by writing the name of each category on an envelope, with the amount of cash you have decided to put in (determined by your average spending habits and adjusted budget). I had a great time picking out cute, design-printed envelopes for our system.

5. Hit the ATM and bring on the cash! Decide how often you want to fill your envelopes and who will fill each envelope. If you get paid bi-weekly, you will want to put half the monthly amount in the envelope for each category per paycheck. My husband and I are each responsible for filling different envelopes with cash every other week so that we are both contributing to our family's budget.

6. Decide your rules. What will you do if you run out of money in a category or have money left over at the end of the month? Some people suggest that when you are out of money in a category, you simply stop spending in that category. Others suggest that you may borrow money from another category if you run out, or put into savings any money that is left over. Pick the rules that work best for your family. However, remember that when ALL the envelopes are empty – you stop spending!

7. Plan your shopping trip. Going to Target? Decide what you are going to shop for, and take the appropriate envelope(s) of cash with you. No cash in the envelope? Guess that seemingly unquenchable desire for a new purse will have to wait!

8. Be flexible. Know that you will not accurately determine how much money you need for each category right away. This process may take up to 6 months before it becomes a science for your family. Be flexible in allowing yourself or your spouse to change the amount of money available for each category as needed. When we first started, we had an envelope dedicated to "Baby Items," but after a few months we combined this category with "Grocery" since we tend to buy all of these items in the same place at the same time. Be prepared for adjustments.

Using cash is a study-approved way to spend less. Physically watching money leave your possession is proven to help shoppers spend 10-15% less over debit and credit card purchases. In order for this budget to work, everyone in the family must be on board and willing to use the system. If executed correctly, the envelope system will stop overspending right in its tracks and never leave you wondering where all your money has gone!

This has been a guest post by Hillary from Lansing, MI
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